2008 (12) TMI 440 - AT - Income Tax

Computation of book profits u/s 115JB - Minimum alternate tax - gain on sale of units of mutual fund - not credited to the profit and loss account - directly taken to the Reserves Accounts in the balance sheet - claim of the assessee is that the said profit arising on redemption of units of mutual fund is arising on sale of the assets shown under investment and have no link with the business carried on by the assessee and as such these were not routed through the profit and loss account. HELD THAT - In view of the ratio laid down by the Hon ble Supreme Court in Apollo Tyres Ltd. s case 2002 (5) TMI 5 - SUPREME COURT and by the jurisdictional High Court in Akshay Textiles Trading Agencies (P.) Ltd. s case 2007 (10) TMI 251 - BOMBAY HIGH COURT we hold that where the accounts of a Company are maintained as per the Provisions of Companies Act and are Certified by the Auditors to the effect that the same are maintained as per the requirements of the Companies Act and the same are approved by the shareholders of the company in its annual general meeting and filed before the Registrar of Companies the authenticity of such accounts has to be accepted by AO while computing the book profits u/s 115J/115JA/115JB. AO is however empowered to make such adjustments as provided for in the Explanation to the respective section. Once an asset is held as an investment by a company and is reflected as an investment in the balance sheet of the company from year to year then any gain on sale of such investments is not linked to the profits and gains of the business carried on by the respective companies. The said gain of sale of units on mutual funds was offered to tax in the respective hands of the companies for the year under appeal. Where the accounts are prepared and certified by the auditors which in-turn are approved/adopted by the shareholders of the company and are filed before the Registrar of the Companies AO has no powers of disturbing the profits of business as held by the Hon ble Supreme Court in Apollo Tyres Ltd. s case (supra). Only power of the AO is to make suitable adjustments to the profits of business under the Explanation to section 115JB. The said adjustments are relatable to the profits and gains of business carried on by the assessee. Any gain arising on sale of investments though taxable may necessarily be not routed through Profit and Loss Account. We uphold the order of CIT(A) that no adjustments on account of gain on sale of units of mutual fund is to be made while working out the book profits u/s 115JB. The grounds of appeal raised by the Revenue are dismissed. In the result all the seven appeals filed by the revenue in the case of seven different assessees mentioned above are dismissed.

Issues Involved:
1. Deletion of additions made by the Assessing Officer (AO) on account of profit earned by way of redemption of units of mutual funds.
2. Whether the AO has the power to disturb the profit and loss account while applying the provisions of section 115JB of the Income-tax Act.
3. The applicability of the decision in the case of Apollo Tyres Ltd. and other related judgments.

Issue-wise Detailed Analysis:

1. Deletion of Additions by CIT(A):
The common issue raised by the Revenue in these appeals is the deletion of additions made by the AO in the profit and loss account for computing income under section 115JB on account of profit earned by way of redemption of units of mutual funds. The Revenue contended that the profits were directly taken to the balance sheet as capital reserve without routing through the profit & loss account, contrary to mandatory accounting standards. The CIT(A) relied on the decision in Apollo Tyres Ltd. to direct the AO to delete the additions.

2. AO's Power to Disturb the Profit and Loss Account:
The AO argued that the book profits must be determined as per Schedule VI of the Companies Act, which requires all income to be recognized in the profit and loss account. The AO cited the provisions of the Companies Act and Accounting Standards issued by ICAI, which mandate that profits and losses on investments should be reflected in the profit and loss account. The AO made adjustments to the book profits under section 115JB, arguing that the profits from the sale of mutual fund units should have been included in the profit and loss account.

3. Applicability of Apollo Tyres Ltd. Decision:
The assessee's counsel argued that the issue is covered by the Supreme Court's decision in Apollo Tyres Ltd., which held that the AO cannot disturb the profit and loss account other than as provided in the Explanation to section 115JB. The counsel contended that the accounts were certified by auditors, approved by shareholders, and filed with the Registrar of Companies, and thus the AO had no authority to make adjustments. The Tribunal considered the Supreme Court's judgment, which emphasized that the AO has limited power to examine whether the books of account are certified as per the Companies Act and can only make adjustments as provided in the Explanation to section 115JB.

Conclusion:
The Tribunal upheld the CIT(A)'s order, stating that the AO has no authority to disturb the profit and loss account certified by the auditors and approved by the shareholders. The Tribunal relied on the Supreme Court's decision in Apollo Tyres Ltd., which restricts the AO's power to make adjustments to the book profits only as provided in the Explanation to section 115JB. The Tribunal dismissed the Revenue's appeals, affirming that the gain on redemption of mutual fund units, held as investments, should not be included in the profit and loss account for computing book profits under section 115JB.

Result:
All seven appeals filed by the Revenue were dismissed in favor of the assessee.

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